Edited version of private advice

Authorisation Number: 1052132041917

Date of advice: 21 June 2023

Ruling

Subject: Section 23AG - exempt income

Question

Is your employment income derived in Country X as an Australian employee exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

11 July 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You are a member of a disciplined force.

You are stationed in Country X full-time.

In July 20XX, you commenced a posting as per Organisation One direction.

In July 20XX, your posting will conclude.

You entered Country X on an official passport and visa.

You are paid full-time by Organisation One.

The salary you receive from Organisation One has been your only source of income and earnings during your full-time continuous service.

Income from employment is usually subject to tax in Country X.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23AG

International Tax Agreements Act 1953

Reasons for decision

Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that foreign earnings of an Australian resident derived during a continuous period of foreign service of not less than 91 days employment in a foreign country are exempt from tax in Australia.

A person deployed outside of Australia as a member of a disciplined force may qualify for the exemption.

'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes income consisting of earnings, salary, wages and allowances (subsection 23AG(7) of the ITAA 1936).

However, subsection 23AG(2) of the ITAA 1936 applies, to deny an exemption, if the foreign earnings are exempt from tax in the foreign country only because of one or more of the following reasons:

•         a double tax agreement with Australia or a law giving effect to a double tax agreement (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936);

•         a law of that foreign country which generally exempts from, or does not provide for, the imposition of tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936), or

•         a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations (paragraphs 23AG(2)(e), 23AG(2)(f) and 23AG(2)(g) of the ITAA 1936).

Australia has a double tax agreement with Country X, therefore paragraphs 23AG)(a) and (b) are relevant.

Therefore, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) so that those Acts are read as one.

Schedule X of the Agreements Act contains the tax treaty between Australia and Country X which operates to avoid double taxation of income received by Australian and Country X residents.

Article X of the Convention between Australia and Country X provides that salary, wages, and other similar remuneration paid to an individual for services rendered in Country X shall be taxable only in Australia unless the individual was a resident of Country X and either they were a national of Country X or they became a resident of Country X for another purpose.

Application to your circumstances

In your case, you are a resident of Australia who is currently stationed full-time in Country X for an extended period. Your remuneration is derived by undertaking service under the direction of Organisation One.

The income you derive from your foreign service is exempt from tax in Country X because of the double tax agreement between Australia and Country X which is one if the reasons listed in subsection 23AG(2) of the ITAA 1936.

Therefore, the exemption from tax under subsection 23AG(1) of the ITAA 1936 does not apply as your income is exempt from income tax in the foreign country only because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936.

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